CONTENTS PREFACE xix PART 1 THE ENTREPRENEURIAL PERSPECTIVE 1 1 THE NATURE AND IMPORTANCE 2 OF ENTREPRENEURS Opening Profile: Oprah Winfrey 3 Nature and Development of Entrepreneurship 6 Earliest Period 6 Middle Ages 6 17th Century 6 18th Century 7 19th and 20th Centuries 7 Definition of Entrepreneur Today 8 The Entrepreneurial Decision Process 9 Change from Present Lifestyle 10 Desirability of New Venture Formation 11 Possibility of New Venture Formation 12 Types of Start-Ups 14 Role of Entrepreneurship in Economic Development 15 Government as an Innovator 15 Intrapreneurship 17 Entrepreneurship 17 Entrepreneurial Careers and Education 17 Ethics and Social Responsibility of Entrepreneurs 22 The Future of Entrepreneurship 23 2 THE ENTREPRENEURIAL 34 AND INTRAPRENEURIAL MIND Opening Profile: Ewing Marion Kauffman 35 The Entrepreneurial Process 38 Identify and Evaluate the Opportunity 38 Develop a Business Plan 40 Determine the Resources Required 40 Manage the Enterprise 40 Managerial versus Entrepreneurial Decision Making 41 Strategic Orientation 42 Commitment to Opportunity 42 Commitment of Resources 42
x CONTENTS Control of Resources 42 Management Structure 42 Causes for Interest in Intrapreneurship 43 Corporate versus Intrapreneurial Culture 45 Climate for Intrapreneurship 48 Intrapreneurial Leadership Characteristics 49 Establishing Intrapreneurship in the Organization 51 Problems and Successful Efforts 52 3 THE INDIVIDUAL ENTREPRENEUR 58 Opening Profile: Robert Mondavi 59 Entrepreneurial Feelings 62 Locus of Control 62 Feelings about Independence and Need for Achievement 63 Risk Taking 64 Entrepreneur Background and Characteristics 64 Childhood Family Environment 64 Education 65 Personal Values 65 Age 66 Work History 67 Motivation 67 Role Models and Support Systems 68 Moral-Support Network 68 Professional-Support Network 68 Male versus Female Entrepreneurs 69 Minority Entrepreneurship 72 Entrepreneurs versus Inventors 73 4 INTERNATIONAL ENTREPRENEURSHIP 82 OPPORTUNITIES Opening Profile: A. Malachi Mixon, III 83 The Nature of International Entrepreneurship 86 The Importance of International Business to the Firm 86 International versus Domestic Entrepreneurship 87 Economics 87 Stage of Economic Development 87 Balance of Payments 87 Type of System 87 Political-Legal Environment 88 Cultural Environment 88 Technological Environment 90 Strategic Issues 90 Entrepreneurial Entry into International Business 92 Exporting 92
CONTENTS xi CASES FOR PART 1 Nonequity Arrangements 93 Direct Foreign Investment 94 Barriers to International Trade 96 General Agreement on Tariffs and Trade (GATT) 96 Increasing Protectionist Attitudes 98 Trade Blocs and Free Trade Areas 98 Entrepreneur s Strategy and Trade Barriers 98 Entrepreneurial Partnering 99 Case 1A Turner Test Prep Co. 103 Case 1B A. Monroe Lock and Security Systems 105 Case 1C Beijing Sammies 108 Case 1D Mamma Mia! The Little Show that Could! 122 PART 2 CREATING AND STARTING THE VENTURE 131 5 CREATIVITY AND THE BUSINESS IDEA 132 Opening Profile: Frederick W. Smith 133 Sources of New Ideas 135 Consumers 135 Existing Products and Services 136 Distribution Channels 136 Federal Government 136 Research and Development 136 Methods of Generating Ideas 137 Focus Groups 137 Brainstorming 138 Problem Inventory Analysis 138 Creative Problem Solving 139 Brainstorming 139 Reverse Brainstorming 140 Brainwriting 140 Gordon Method 140 Checklist Method 141 Free Association 142 Forced Relationships 142 Collective Notebook Method 143 Attribute Listing 143 Big-Dream Approach 143 Parameter Analysis 143 Opportunity Recognition 144 Product Planning and Development Process 144 Establishing Evaluation Criteria 145
xii CONTENTS Idea Stage 146 Concept Stage 147 Product Development Stage 149 Test Marketing Stage 150 E-Commerce and Business Start-Up 150 Using E-Commerce Creativity 150 Website 151 Tracking Customer Information 152 Doing E-Commerce as an Entrepreneurial Company 152 6 LEGAL ISSUES FOR THE ENTREPRENEUR 158 Opening Profile: Daniel Schreiber 159 What is Intellectual Property? 160 Need for a Lawyer 160 How to Select a Lawyer 161 Legal Issues in Setting Up the Organization 161 Patents 161 International Patents 163 The Disclosure Document 164 The Patent Application 164 Patent Infringement 165 Business Method Patents 166 Trademarks 166 Registering the Trademark 167 Copyrights 168 Trade Secrets 170 Licensing 172 Product Safety and Liability 174 Insurance 175 Contracts 177 7 THE BUSINESS PLAN: CREATING 184 AND STARTING THE VENTURE Opening Profile: Belinda Guadarrama 185 Planning as Part of the Business Operation 186 What is the Business Plan? 187 Who Should Write the Plan? 187 Scope and Value of the Business Plan Who Reads the Plan? 188 How Do Potential Lenders and Investors Evaluate the Plan? 189 Presenting the Plan 191 Information Needs 192 Market Information 192 Operations Information Needs 195 Financial Information Needs 195 Using the Internet as a Resource Tool 196 Writing the Business Plan 196
CONTENTS xiii Introductory Page 197 Executive Summary 197 Environmental and Industry Analysis 199 Description of Venture 200 Production Plan 202 Operations Plan 204 Marketing Plan 204 Organizational Plan 204 Assessment of Risk 205 Financial Plan 205 Appendix 206 Using and Implementing the Business Plan 206 Measuring Plan Progress 207 Updating the Plan 207 Why Some Business Plans Fail 208 8 THE MARKETING PLAN 218 Opening Profile: Michael S. Dell 219 Industry Analysis 221 Competitor Analysis 221 Marketing Research for the New Venture 222 Step One: Defining the Purpose or Objectives 223 Step Two: Gathering Data from Secondary Sources 223 Step Three: Gathering Information from Primary Sources 223 Step Four: Analyzing and Interpreting the Results 226 Understanding the Marketing Plan 226 Characteristics of a Marketing Plan 227 The Marketing Mix 230 Steps in Preparing the Marketing Plan 231 Defining the Business Situation 231 Defining the Target Market/Opportunities and Threats 231 Considering Strengths and Weaknesses 233 Establishing Goals and Objectives 234 Defining Marketing Strategy and Action Programs 234 Marketing Strategy: Consumer versus Business-to-Business Markets 238 Budgeting the Marketing Strategy 240 Implementation of the Market Plan 240 Monitoring Progress of Marketing Actions 240 Contingency Planning 240 Why Some Plans Fail 240 9 THE ORGANIZATIONAL PLAN 248 Opening Profile: Starbucks 249 Developing the Management Team 250 Legal Forms of Business 251 Ownership 251 Liability of Owners 252
xiv CONTENTS Costs of Starting a Business 253 Continuity of Business 254 Transferability of Interest 254 Capital Requirements 255 Management Control 255 Distribution of Profits and Losses 256 Attractiveness for Raising Capital 256 Tax Attributes of Forms of Business 256 Tax Issues for Proprietorship 258 Tax Issues for Partnership 258 Tax Issues for Corporation 259 The Limited Liability Company versus the S Corporation 259 S Corporation 259 Advantages of an S Corporation 260 Disadvantages of an S Corporation 260 The Limited Liability Company 260 Advantages of an LLC 261 Designing the Organization 261 Building the Management Team and a Successful Organization Culture 264 The Role of a Board of Directors 265 The Board of Advisors 267 The Organization and Use of Advisors 267 10 THE FINANCIAL PLAN 274 CASES FOR PART 2 Opening Profile: Bill Porter E*TRADE and ISE 275 Operating and Capital Budgets 277 Pro Forma Income Statements 278 Pro Forma Cash Flow 282 Pro Forma Balance Sheet 285 Break-Even Analysis 287 Pro Forma Sources and Applications of Funds 288 Software Packages 290 Case 2A Bizland, Inc. 295 Case 2B The Beach Carrier 301 Case 2C Gourmet to Go 304 Case 2D Intervela D.O.O. Koper Victory Sailmakers 311 PART 3 FINANCING THE NEW VENTURE 319 11 SOURCES OF CAPITAL 320 Opening Profile: Walt Disney 321
CONTENTS xv An Overview 323 Debt or Equity Financing 323 Internal or External Funds 324 Personal Funds 326 Family and Friends 327 Commercial Banks 328 Types of Bank Loans 328 Cash Flow Financing 329 Bank Lending Decisions 330 Role of SBA in Small Business Financing 331 Research and Development Limited Partnerships 332 Major Elements 332 Procedure 333 Benefits and Costs 333 Examples 334 Government Grants 334 Procedure 335 Private Placement 336 Types of Investors 336 Private Offerings 336 Regulation D 337 Bootstrap Financing 340 12 INFORMAL RISK CAPITAL 346 AND VENTURE CAPITAL Opening Profile: Tom Kitchin 347 Financing the Business 348 Informal Risk-Capital Market 350 Venture Capital 353 Nature of Venture Capital 353 Overview of the Venture-Capital Industry 353 Venture-Capital Process 359 Locating Venture Capitalists 362 Approaching a Venture Capitalist 362 Valuing Your Company 364 Factors in Valuation 365 Ratio Analysis 366 Liquidity Ratios 366 Activity Ratios 366 Leverage Ratios 367 Profitability Ratios 368 General Valuation Approaches 368 General Valuation Method 370 Evaluation of an Internet Company 370 Deal Structure 372
xvi CONTENTS CASES FOR PART 3 Case 3A The Winslow Clock Company 378 Case 3B NeoMed Technologies 387 Case 3C Rug Bug Corporation 402 Case 3D Nature Bros. Ltd. 413 PART 4 MANAGING, GROWING, 421 AND ENDING THE NEW VENTURE 13 ENTREPRENEURIAL STRATEGY: GENERATING 422 AND EXPLOITING NEW ENTRIES Opening Profile: Justin Parer 423 New Entry 424 Generation of a New Entry Opportunity 425 Resources as a Source of Competitive Advantage 425 Creating a Resource Bundle That is Valuable, Rare, and Inimitable 426 Assessing the Attractiveness of a New Entry Opportunity 429 Information on a New Entry 429 Comfort with Making a Decision under Uncertainty 430 Decision to Exploit or Not to Exploit the New Entry 430 Entry Strategy for New Entry Exploitation 431 Environmental Instability and First-Mover (Dis)Advantages 433 Customers Uncertainty and First-Mover (Dis)Advantages 435 Lead Time and First-Mover (Dis)Advantages 437 Risk Reduction Strategies for New Entry Exploitation 438 Market Scope Strategy 439 Imitation Strategies 440 Managing Newness 442 14 STRATEGIES FOR GROWTH AND MANAGING 450 THE IMPLICATIONS OF GROWTH Opening Profile: Brian and Jennifer Maxwell 451 Growth Strategies: Where to Look for Growth Opportunities 452 Penetration Strategies 453 Market Development Strategies 454 Product Development Strategies 454 Diversification Strategies 455 Example of Growth Strategies 456 Economic Implications of Growth 458 Implications of Growth for the Firm 459 Pressures on Existing Financial Resources 460 Pressures on Human Resources 460
CONTENTS xvii Pressures on the Management of Employees 460 Pressures on the Entrepreneur s Time 460 Overcoming Pressures on Existing Financial Resources 460 Financial Control 461 Managing Cash Flow 461 Managing Inventory 462 Managing Fixed Assets 465 Managing Costs and Profits 465 Taxes 468 Record Keeping 468 Overcoming Pressures on Existing Human Resources 469 Overcoming Pressures on the Management of Employees 470 Overcoming Pressures on Entrepreneurs Time 472 Basic Principles of Time Management 473 Implications of Firm Growth to the Entrepreneur 474 A Categorization of Entrepreneurs and Their Firms Growth 475 15 ACCESSING RESOURCES FOR GROWTH 482 FROM EXTERNAL SOURCES Opening Profile: Bill Gross 483 Using External Parties to Help Grow a Business 484 Franchising 485 Advantages of Franchising to the Franchisee 485 Advantages of Franchising to the Franchisor 487 Disadvantages of Franchising 488 Types of Franchises 488 Investing in a Franchise 489 Joint Ventures 493 Types of Joint Ventures 493 Factors in Joint Venture Success 494 Acquisitions 495 Advantages of an Acquisition 495 Disadvantages of an Acquisition 496 Synergy 497 Structuring the Deal 497 Locating Acquisition Candidates 497 Mergers 498 Leveraged Buyouts 499 Overcoming Constraints by Negotiating for More Resources 500 16 GOING PUBLIC 510 Opening Profile: Sam Walton 511 Advantages and Disadvantages of Going Public 513 Advantages 513 Disadvantages 514
xviii CONTENTS The Alternatives to Going Public 517 Timing of Going Public and Underwriter Selection 519 Timing 519 Underwriter Selection 520 Registration Statement and Timetable 521 The Prospectus 523 Part II 524 Procedure 524 Legal Issues and Blue-Sky Qualifications 526 Legal Issues 526 Blue-Sky Qualifications 527 After Going Public 527 Aftermarket Support 527 Relationship with the Financial Community 527 Reporting Requirements 528 Myths concerning Going Public 528 17 ENDING THE VENTURE 534 CASES FOR PART 4 Opening Profile: Adelphia Communications Corporation William Schleyer 535 Bankruptcy An Overview 536 Chapter 11 Reorganization 539 Surviving Bankruptcy 540 Prepackaged Bankruptcy 541 Chapter 13 Extended Time Payment Plans 541 Chapter 7 Liquidation 542 Strategy during Reorganization 542 Keeping the Venture Going 543 Warning Signs of Bankruptcy 545 Starting Over 545 The Reality of Failure 546 Business Turnarounds 547 Exit Strategy 548 Succession of Business 548 Transfer to Family Members 549 Transfer to Non Family Members 549 Harvesting Strategy 551 Direct Sale 551 Employee Stock Option Plan 552 Management Buyout 552 Case 4A Oklahoma National Bank 558 Case 4B Datavantage Corporation 567 Case 4C Dual Pane Company 578 INDEX 581